Sponsor

Sponsor. An innocuous little two-syllable word. But in the rough-house world of New York real estate, the sponsor – the party who creates a co-op or condo either by converting a rental building or erecting a new structure – is often seen as a villain. Sponsor, in the eyes of many co-op shareholders and condo unit-owners, is one very dirty little word.

In an ideal world, the sponsor fades from the scene, steadily selling off apartments until he relinquishes control of the building to the residents and their elected board of directors.

Trouble tends to arise when a sponsor retains ownership of a significant number of apartments after the conversion or new construction is complete. This typically leads to a strong sponsor presence on the co-op or condo board, and a litany of related problems – lower values because of the prevalence of rental apartments; increased wear and tear on the building because of rental unit turnover; difficulty in refinancing mortgages for shareholders or unit-owners; and trouble securing mortgage financing for prospective buyers.

To top it off, the sponsor frequently controls the board and hires a management company or manages the property himself, which can lead to confusion and distrust about the building’s financial health. For the residents of co-ops and condos, it’s almost always a lose-lose situation. Worst of all, the remedy is rarely pretty or cheap.

No Board Meetings

Consider the state of affairs at the Wainwright Condominium in Forest Hills, Queens, which was built in the 1940s, converted to a condo in the 1990s, and is now home to 67 apartments and one commercial space. Though the building went condo two decades ago, the sponsor still retains ownership of just over 50 percent of the building – 34 apartments, plus the commercial space. All the while the sponsor has controlled the board and managed the property.

“They never wanted to have a board meeting,” says Dan Arana, a forensic scientist who bought an apartment in the building in 2008. “We felt that our requests were being ignored and the building was falling into disrepair. Security cameras weren’t working. Our laundry room was robbed in late 2011, and our super was assaulted during the robbery.”

Sandra Mendoza, a cancer researcher at New York University, bought an apartment in 1993 – one of the last apartments the sponsor would sell. She soon got elected to the five-member board, which included three sponsor members and two unit-owners.

“When something needed to be fixed, we had to beg the sponsor,” Mendoza says. “Instead of helping the building gain value, they drove it down. The boiler kept breaking down and they wouldn’t replace it. I had major leaks by my windows because of failure to maintain the exterior bricks. But the sponsor made us feel like we didn’t have a say. We thought we couldn’t fire them [as manager] since they owned more than 50 percent of the units. That was part of our ignorance.”

Arana has personal experience with the downside of high sponsor ownership. When he tried to refinance his mortgage with Chase, he was rejected – on the grounds that a building that’s more than 50 percent sponsor-owned is a bad risk for a bank. As a rule of thumb, banks are reluctant to offer mortgages or refinancing in buildings where the sponsor owns more than 10 percent of the units.

At the annual meeting in November of 2011, Arana, Mendoza, and a like-minded unit-owner named Argemira Acevado won seats on the five-member board, wresting control from the sponsor. The new majority got the sponsor to agree to come to a meeting in May of 2012, which Arana tape-recorded. At that meeting, Arana proposed that the board fire the sponsor as property manager and hire All Area Realty. The vote was 3-1 in favor. (The second sponsor board member did not attend the meeting.)

Blindsided

Two weeks later the sponsor’s attorney sent the board a letter saying a special meeting would be held in May. That “blindsided us,” Arana says. The unit-owners did not bring a lawyer to the meeting, and they watched, stunned, as the sponsor, who – without giving a reason – invalidated the results of the previous election, removed the three residents from the board, installed five hand-picked members, and voted to re-hire the sponsor’s management company.

It was a nightmare for the unit-owners at the Wainwright, who were so unsure about electoral procedures that they didn’t challenge the sponsor’s claim (by the time they did, more than four months – the statute of limitations for electoral challenges – had passed, and the sponsor’s actions stood). “They should have had a lawyer to advise them,” notes Abbey Goldstein, a partner in Goldstein & Greenlaw, who subsequently represented the three ousted members. To this day, the condo association still does not have an independent (i.e. non-sponsor) attorney looking out for its interests.

The power grab was also, on the face of it, illegal. By law, the sponsor in a co-op conversion is required to turn over control of the board after 50 percent of the apartments are sold or five years have elapsed after the first closing, whichever comes first. In new construction, the number of apartments to be sold can be dictated by the sponsor, as long as it’s spelled out in the offering plan and bylaws. Regardless of that number, the sponsor must cede control of the building within five years.

Precedent is on their side: in the landmark 2002 case, 511 West 232nd Owners Corp. v. Jennifer Realty Co., the court of appeals ruled that the sponsor had breached the contract of the offering plan by retaining ownership of 40 units in a 66-unit building in Riverdale.

The “defrocked” board members at the Wainwright tried to negotiate a settlement with the sponsor. When that failed, they hired attorney Goldstein as their personal attorney, for what appeared to be the last and least desirable resort – a legal challenge.

“It’s a mess, and it’s expensive,” says Goldstein. “All of this is an outgrowth of the sponsor not selling his units. They have to sell [under the Jennifer Realty ruling], but they disregard it because most boards don’t want to do battle with the sponsor. It’s expensive – many thousands of dollars – and it can be protracted.”

In an affidavit filed with court papers, Arana stated: “Our voices were effectively muted when the sponsor unilaterally took control of the board in contravention of the offering plan and the condominium’s bylaws.” The suit seeks to set a date for a new board election and prevent the sponsor from electing a majority on the new seven-member board.

Adds Goldstein: “Very often, when management is controlled by the sponsor, residents have a hard time getting their complaints addressed. Since the managing agent is at the beck and call of the sponsor, there’s no one who will represent the shareholders or unit-owners. Even when abuses are not happening, there are no checks and balances if the residents don’t control their own fate. The attorney general’s office has control over sponsors, but they’re useless. They almost literally never take action to reel in sponsors. So you have to go to court, which plays right into the hands of the sponsor.”

Frost Report

The picture is not quite as dark at Frost House, a 163-unit co-op in the Lenox Hill section of Manhattan. But it’s far from pretty. When this 1960s-vintage building was converted in 1988, the sponsor controlled 60 apartments. Today, he still owns 51 of them – 30 percent of the building.

“It’s not a viable co-op,” says Steven Sladkus, a partner at the law firm Wolf Haldenstein Adler Freeman & Herz, the lawyer who has represented the board for the past 15 years. “The sponsor has a profit center going on in the building,” Sladkus adds. “Fourteen of his apartments are rent-stabilized and 37 are free market. And rental tenants put extra strain on the building because they don’t care about a building the same way that shareholders do.”

Which brings us to yet another downside of so-called sponsor units. In cooperatives, they can be rented to tenants who are not required to pass the board’s entry requirements for prospective buyers – effectively robbing the co-op of one of its prime attractions: the ability to control the building’s makeup. Apartments rented by the sponsor also bypass the annual sublet fees, which can potentially deprive the co-op of considerable income.

The Frost House board called an informational “town hall” meeting in late April, which attracted several dozen shareholders, to discuss the progress of a complaint the board had filed against the sponsor in state supreme court last November, seeking an injunction that would force the sponsor to sell unsold apartments in a timely fashion. Many shareholders expressed concern about the potential cost of moving forward with a lawsuit, according to Sladkus. But the board appears to be out of options.

“The shareholders have been asking the sponsor to sell his apartments for years and years,” Sladkus says, “and they’ve finally gotten fed up. The sponsor has refused to enter into any reasonable schedule to sell. He essentially said, ‘Screw you.’ The only recourse after that is to sue.”

The sponsor currently holds one seat on the seven-member board. The board’s legal filing notes that the sponsor cannot elect a majority of the board once it owns fewer than half the shares or after two years from conversion, whichever comes first. Both of those conditions were met long ago.

“Nonetheless,” the complaint states, “the sponsor’s continued ownership of unsold apartments entitles it to vote the share of co-op stock appurtenant to the unsold apartments, which amount to nearly one-third of the co-op’s outstanding shares. This necessarily reduces control that resident shareholders of the co-op have over the building that should be their space.”

There’s yet another drawback to such a strong sponsor presence, according to the legal complaint: “As long as the sponsor retains ownership of the unsold apartments, it thus has veto power over virtually any amendments that the co-op shareholders might want to make to the co-op’s bylaws.”

“Thirty percent is still powerful enough to make a difference,” says Steven Anderson, a partner in the law firm of Anderson & Ochs, who has represented many boards in their effort to wrest control from sponsors. Such conflicts, as he has seen, have deep roots. “Sponsors have financial interests that are embedded,” Anderson says. “They may have a sweetheart lease on commercial property, they may still own apartments. They’re not precluded on voting just because they don’t control the majority of the board. As a practical matter, they still have some control. You can try to negotiate with a sponsor, but it’s hard to do. Unfortunately, it’s not uncommon to have to start litigation to get a sponsor out.”

The Good Sponsor

Every once in a while, even in New York, things work out the way they’re supposed to. At the Dwyer, a 51-unit condominium that opened in Harlem in 2006, sponsor John Cross has not disappeared entirely. But he has gone gracefully into the margins, much to the delight of the condo’s unit-owners and board members.

Cross, a native of Michigan, came to New York in the 1970s to make it as an artist. He pounded nails to pay the bills, and when his art dream failed to take flight, he started getting deeper into construction, renovating lofts, rehabbing abandoned buildings, eventually building market-rate condos from the ground up, beginning in the 1990s.

“My goal at the Dwyer was to sell the apartments, keep one for myself, and make some money,” says Cross. “The sales fell through on three apartments, so I decided to keep them.”

Today, Cross lives part-time in a top-floor apartment, rents out his other three apartments at market rates, owns one of the building’s two commercial spaces, and holds one seat on the seven-member board, which oversees the entire building. (There is also a five-member board that deals only with the residential part of the building.)

While Cross has no designs on owning a large chunk of the building’s apartments or controlling the board, he questions the conventional wisdom that paints all sponsors as greedy bogeymen. “If a sponsor retains 30 percent of the units and they’re managing the building, wouldn’t you think he would be deeply committed to the building?” he asks. “But that isn’t the response you get from unit-owners. Does the typical response make sense?”

From his experience rehabilitating old buildings and erecting new ones in the city, Cross has learned that friction is inevitable. “There are always problems,” he says, “particularly in new buildings, where people are all enthusiastic. They may have unrealistic expectations. So it takes a lot of cooperation and hard work by the sponsor and unit-owners to make a building work. We’ve had problems here, but we’ve worked them out because everyone cooperates.”

“We are very, very fortunate in having John as our sponsor,” says Carlie Meer, the Dwyer’s board president. “He’s the developer-sponsor, but he also owns a unit that he lives in with his wife. That’s a double-edged sword for him. People see him all the time, so they feel [they can ask him] to fix things. But it’s been five years – it’s beyond the period when that can be expected. Still, John has been very accommodating.”

In the end, the sponsor’s interests might not always be at odds with those of the board and the residents. “When the board and the sponsor share a sincere interest in the building’s success, it may still be an acrimonious relationship but eventually the building works,” Cross says. “This is a lovely building. People throw parties and show movies on the roof. The place has a great vibe – because people are willing to cooperate.”

6 REASONS TO TELL THE SPONSOR,“HIT THE ROAD, JACK”

1
In co-ops, sponsor units can be rented to tenants who are not required to pass the board’s entry requirements for prospective buyers – effectively robbing the co-op of one of its prime attractions, the ability to control the building’s makeup.

2
Apartments rented by the sponsor bypass any annual sublet fees, which potentially deprives co-ops of considerable income.

3
When management is controlled by the sponsor, residents have a hard time getting their complaints addressed. Since the managing agent is run by the sponsor, there’s no one who will represent the shareholders or unit-owners when the interests of the sponsor and those of the co-op/condo diverge. Even when abuses are not happening, there are no checks and balances.

4
As a rule of thumb, banks are reluctant to offer mortgages or refinancing in buildings where the sponsor owns more than 10 percent of the units. For similar reasons, there is often trouble securing mortgage financing for prospective buyers, which will ultimately hurt resales.

5
As long as the sponsor retains ownership of the unsold apartments, he has veto power over virtually any amendments that the co-op shareholders might want to make to the co-op’s bylaws.

6
There is usually increased wear and tear on the building because of frequent rental unit turnover.